Are BAE Systems plc, Paypoint plc & Premier Oil PLC Set To Post Stellar Returns?

Shares in payment systems specialist Paypoint (LSE: PAY) have slumped by 10% today after it released a disappointing set of results. The company’s pretax profit fell to £3m in the first half of the year from £22m in the first half of last year as it experienced a goodwill impairment charge of £18m for the online payments business which is currently up for sale.

The reason for the impairment of goodwill is that Paypoint has not yet received a satisfactory offer for the division, and so has decided to write off the entire goodwill of the business. Despite this, Paypoint’s results are generally in-line with expectations, although a drop in revenue and a rise in administrative expenses highlight the challenging trading conditions which the company appears to be facing.

Looking ahead, Paypoint is forecast to increase its bottom line by 3% in the current year and by a further 7% next year. Although this rate of growth is in-line with that of the wider index, Paypoint’s price to earnings (P/E) ratio of 15.1 appears to be rather generous. As such, the company’s share price could come under further pressure in the coming months, meaning that prudent investors may find better opportunities elsewhere.

One prime example is BAE Systems (LSE: BA). It is in the midst of a difficult period since defence spending by developed countries has come under pressure in recent years. While this led to a profit warning last year, BAE has made a strong comeback and is forecast to return to positive profit growth in the next financial year.

Looking further ahead, the outlook for the defence sector is relatively upbeat as spending on defence across the globe is set to increase as the developed world moves further away from austerity policies. This means that BAE’s P/E ratio of 13.6 could be subject to an upward rerating and, alongside a yield of 4.1%, it indicates that the company’s shares are set to continue their outperformance of the FTSE 100 of recent years.

Meanwhile, Premier Oil (LSE: PMO) is also struggling to combat negative external factors, with the low oil price causing major write downs to the value of its asset base as well as reduced revenue. As a result, the company is due to make a loss in the current year but, crucially, is expected to return to a black bottom line next year. This has the potential to improve investor sentiment during the course of 2016 and, with Premier Oil trading on a price to book value (P/B) ratio of only 0.4, there is plenty of scope for share price gains.

Clearly, further falls in the price of oil are a very real threat to Premier Oil and, looking ahead, it would be of little surprise for this to happen over the short to medium term. However, with a relatively wide margin of safety, further challenges appear to be priced in and this means that for long term, less risk averse investors Premier Oil appears to be a sound buy at the present time.

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Peter Stephens owns shares of BAE Systems. The Motley Fool UK owns shares of PayPoint. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.